Return On Marketing Investment (ROMI) is the contribution to profit attributable to marketing (net of marketing spending). Then again, divided by the marketing ‘invested‘ or risked. Surprisingly, ROMI is unlike ‘Return On Investment‘ (ROI) metrics because marketing is not the same kind of investment.
For instance, instead of money that is ‘tied’ up in plants and inventories (often considered capital expenditure or CAPEX), marketing funds are typically ‘risked’. Meaning, marketing spending is typically expensed in the current period (operational expenditure or OPEX).
The ROMI concept first came to prominence in the 1990s. The phrase “return on marketing investment” became more widespread in the next decade. Following the publication of two books Return on Marketing Investment by Guy Powell (2002) and Marketing ROI by James Lenskold (2003).
In the book “What Sticks: Why Advertising Fails And How To Guarantee Yours Succeeds,” Rex Briggs suggested the term “ROMO” for Return-On-Marketing-Objective, to reflect the idea that marketing campaigns may have a range of objectives, where the return is not immediate sales or profits. For example, a marketing campaign may aim to change the perception of a brand.
How do you calculate ROMI?
In general, the basic formula for calculating return on marketing investment (ROMI) is: [[sales-costs]/marketing costs]. Whereby,
- Sales are the revenue generated from marketing activity recorded as sales to customers, and
- Costs are the costs of generating those sales (cost of goods sold or COGS) and the costs of marketing.
How carefully you define sales and costs can be important in determining your true return on marketing investment.
Below I am going to show you how your reported ROMI can vary from between 5 and 1. Particularly, depending on which numbers you include in the calculation.
See the calculation methods below;
[Total sales/marketing campaign costs]
This is the simplest way to calculate ROMI. You add up all the sales made in a period, say Q1, and divide that sales revenue by your marketing spends in the corresponding Q1 period.
So let’s say you generate £500k in revenue and you have campaign costs of £100k. Your ROMI in this scenario is £500k / £100k = 5 which can also be expressed as 500%.
[Total sales-COGS/marketing campaign costs]
In this scenario, we remove the cost of goods sold (COGS) from the revenue. So let’s say you generate £500k sales but the cost of making the product sold was £250k.
Now the ROI calculation becomes £250k / £100k = 2.5
[Total sales-COGS/total marketing costs]
In this scenario, we calculate revenue as sales-COGS (as in point 2 above), but we include total marketing costs – these can be the costs of all the assets generated plus any agency fees.
So let’s say your sales revenue is £250k (£500k-£250k), but your total marketing costs for the period are:
- Campaign costs – £100k
- Origination costs (e.g. photography, licensing, DM postage, etc) – £25k
- Agency fees – £25k
- Freelancers for internal fulfillment artwork – £20k
A necessary step in calculating ROMI is the measurement and eventual estimation of the incremental sales attributed to marketing.
These incremental sales can be ‘total’ sales attributable to marketing or ‘marginal.
Return On Marketing Investment Metric Forms
In general, there are two forms of the Return on Marketing Investment (ROMI) metric. They include short term and long term metric forms as discussed below;
A. Short Term Metric Form
The first, short-term ROMI, is also used as a simple index measuring the dollars of revenue (or market share, contribution margin or other desired outputs) for every dollar of marketing spent. After all, the value of the first ROMI is in its simplicity.
In most cases, a simple determination of revenue per dollar spent for each marketing activity can be sufficient to help make important decisions to improve the entire marketing mix.
The most common short term approach to measuring ROMI is by applying Marketing Mix Modeling techniques. Particularly, to separate out the incremental sales effects of marketing investment.
B. Long Term Metric Forms
In a similar way the second ROMI concept, long-term ROMI can be used to determine other less tangible aspects of marketing effectiveness. For example, ROMI could be used to determine the incremental value of marketing as it pertains to increased brand awareness, consideration or purchase intent.
In this way, both the longer-term value of marketing activities (incremental brand awareness, etc.) and the shorter-term revenue and profit can be determined. This is a sophisticated metric that balances marketing and business analytics.
And is used increasingly by many of the world’s leading organizations (Hewlett-Packard and Procter & Gamble to name two) to measure the economic (that is, cash-flow derived) benefits created by marketing investments. For many other organizations, this method offers a way to prioritize investments and allocate marketing and other resources on a formalized basis.
Long term ROMI models will often draw on Customer Lifetime Value models to demonstrate the long term value of incremental customer acquisition or reduced churn rate. Some more sophisticated Marketing Mix Modeling approaches include multi-year long term ROMI by including CLV type analysis.
Is the Return On Marketing Investment useful?
The purpose of ROMI is to measure the degree to which spending on marketing contributes to profits. Eventually, each day, marketers are under more and more pressure to “show a return” on their activities. Moreover, the idea of measuring the market’s response in terms of sales and profits is not new.
Usually, marketing spending will be deemed as justified if the ROMI is positive. In a survey of nearly 200 senior marketing managers, nearly half responded that they found the ROMI metric very useful.
In addition, Return on Marketing Investment (ROMI) is a tool that will help marketers to understand marketing programs, plans and manage their budgeting. As well as, communicate the aim and the intention from marketing programs, manage priority, execute and bring off its, monitors and measurements.
In other words, ROMI provides knowledge to know when marketers will invest more or even reduce investment. Equally important, ROMI shows the level of success of marketing activities carried out and will make marketers more successful. At the end, which will be able to change the company’s finances for the better.
Factors to Consider while Utilizing ROMI
Direct measures of the short-term variant of ROMI are often criticized as only including the direct impact of marketing activities. Without including the long-term brand-building value of any communication inserted into the market.
Short-term ROMI is best employed as a tool to determine marketing effectiveness to help steer investments from less productive activities to those that are more productive. It is a simple tool to gauge the success of measurable marketing activities against various marketing objectives. For example, incremental revenue, brand awareness or brand equity.
Long-term ROMI is often criticized as a “silo-in-the-making.” Meaning, it is intensively data-driven and creates a challenge for firms. Especially, that are not used to working business analytics into the marketing analytics that typically determines resource allocation decisions.
Additionally, Long-term ROMI, however, is a sophisticated measure used by a number of firms. For instance, those interested in getting to the bottom of value for money challenges often posed by competing brand managers.
Does Return On Marketing Investment have risks?
Important to realize, the difficulty of measuring ROMI varies across mediums. Results of a recent North American survey show the ROI associated with one-way, traditional media (e.g. television and radio) is more difficult to measure. Than interactive, web-based digital media such as permission-based email marketing or social media marketing.
In 2013, Black Ink introduced Eye On, the first SaaS designed to measure enterprise ROMI across all mediums. With the rise in Digital Marketing, the opportunity is available for marketers, or even business owners to run rough calculations of what their approximate ROI maybe for their campaigns before they even start investing.
However, based on statistical research, and all things being equal, business owners can calculate their current Digital Marketing ROI via their website and web analytics software. In particular, to help them understand their :
- Current Traffic
- Conversion Rate and
- Average Sale.
Add in readily available information on potential traffic from the Google Keyword Tool, and survey costs to acquire that traffic. Surprisingly, business owners or marketers can estimate the potential ROI if that traffic is acquired. And even measure it against other marketing methods.
As a matter of fact, it is often unclear exactly what it means to ‘show a return‘ on marketing investment. Certainly, marketing spending is not an ‘investment‘ in the usual sense of the word. For one thing, there is usually no tangible asset. And often not even a predictable (quantifiable) result to show for the spending.
But, marketers still want to emphasize that their activities contribute to financial health. Some might argue that marketing should be considered an expense. Whereby, the focus should be on whether it is a necessary expense.
On the other hand, marketers believe that many of their activities generate lasting results and therefore should be considered ‘investments‘ in the future of the business.
I hope the above guide was useful in your preparation for your brand, business or even product marketing campaigns. However, if you’ll have additional information, contributions or even suggestions that demands our attention, please Contact Us.
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